Non-Discrimination

Employers that sponsor self-funded group health plans have long been subject to Section 105(h) of the Internal Revenue Code, which prohibits discrimination in favor of highly compensated employees as to both eligibility and benefits. The PPACA provides that rules “similar” to the Section 105(h) requirements are now applicable to non-grandfathered fully insured plans. Because it is not clear how these rules should apply to fully insured plans, the Departments have issued a request for public comment regarding the new rules. Employers should be aware, however, that executive only plans are likely no longer permissible under the PPACA.

Even though the parameters of the nondiscrimination rules are not clear, the penalty for noncompliance is set by statute and is stiff. For self-funded plans, the failure to comply with the nondiscrimination requirements could result in the loss of the tax exemption for the highly compensated individual receiving health benefits provided under the plan. The PPACA takes a different approach for fully insured plans and provides that the penalty is an excise tax on the plan of $100 per day per individual discriminated against (with likely no cap).